Debt, Corruption, and the Good Life in Sherwood Forest

The wave of Obama excitement is sweeping the nation. Change, it seems, is
upon us. Or is it? I often wonder if people such as Obama get what kind of
change is really needed. I hope he does.

There are two things that need to be changed about this country starting ASAP.
There is no time for delay.

CHANGE 1: STOP THE DEBT FLOW.

With oil at $95 and gold above $900, Bernanke is testifying that the Fed is
likely to implement more rate cuts and do whatever is needed to provide liquidity
to the banking system. The Fed, he says, "will act in a timely manner as needed
to support growth and to provide adequate insurance against downside risk."

Sounds nice, but central banks throughout the world are hiking interest rates
to fight inflation. From China to Australia to Sweden, rates are going up.
Yet in America, with wheat prices setting record highs, and gold, oil, corn,
platinum, and myriad other commodities going up and up, Bernanke is cutting
rates as fast as he can! No wonder the dollar is falling!

Lowering rates, of course, encourage more spending and less savings. Does
anyone out there get it? We need MORE SAVINGS and less spending. We are like
some drug addict that has convinced himself that coming down off the high has
only one solution: more drugs. More debt! That is the answer.

Obama recently announced he wants $210 billion in spending to create "green" jobs.
He wants health care for everyone, when we can't even pay for social security!
He wants massive increases in ethanol production, supported by the government.
Poor people throughout the world are suffering from a near doubling in basic
grain prices, and he wants to artificially drive up the price of food via ethanol
so we can feel less guilty about driving our SUVs?

Now, don't get me wrong. I'm not partisan. Statistics prove that Republican
presidents since Eisenhower have spent more than Democrats! In my lifetime,
the biggest spenders have been W. Bush and Ronald Reagan. W's Dad and Clinton
seemed to be the more moderate spenders. So this isn't an issue of he-said-she-said.
It's not he did wrong so I can do wrong.

No, this is an urgent call to our country to stop the debt flow! More debt
and more government programs will only lead to us being in a bigger hole, massive
inflation, and the debasement of our currency. The answer to the debt problem
isn't more debt. The answer to the credit crunch, Mr. Bernanke, isn't more
credit.

What we need is a leader who tells us what we don't want to hear. Unfortunately,
I think Obama is so popular because he's telling us exactly what we do want
to hear! The problem isn't us. The problem is Washington. The problem won't
require pain. It requires hope and imagination! It's simply that the people
in Washington haven't been creative enough. If "creative" is code for move
spending, count me out.

The more things change, the more they stay the same.

Figure 1: The U.S. government budget

Figure 2: Total U.S. public and private debt

CHANGE 2: STOP GOVERNMENT CORRUPTION.

There are many people who believe our system of government is squeaky clean.
America isn't corrupt. It is the most transparent, highly functioning system
in the world.

I believe America is the greatest country in the world. I believe in democracy
and capitalism. I believe in freedom. I believe in the American dream and that
immigrants can have opportunity and their children can be president. I believe
that we helped stop Hitler and we ended the cycle of violence in Europe and
Asia by rebuilding Germany and Japan. I believe we defeated the Soviet Union
through the hard work of our common people.

However, our government and its relationships with private businesses have
gotten out of control. There are thousands of examples, such as all the earmarks
and pork barrel projects. But let me give one example to highlight how subtle,
sinister, and pervasive this corruption truly is.

Higher borrowing costs and general credit market difficulties "could be a
financial tsunami that causes substantial damage throughout our economy," Spitzer
said in the testimony prepared for delivery to a House of Representatives Financial
Services subcommittee. Great. That sounds great. Good for Spitzer.

"We have been clear from the beginning that municipal investors cannot be
allowed to suffer from problems caused by another sector of the market," he
said. Ok. Now he lost me. The government is supposed to protect investors?
Why would he say such a thing?

There must be a reason.

Let's see.

PROBLEM

1) MBIA makes money providing guarantees on municipal bonds.
2) However, MBIA gets greedy and starts guaranteeing subprime mortgages and
CDOs, and not just municipal bonds.
3) MBIA gets caught in the downturn and is threatened with bankruptcy (which
they totally deserve). Their greedy CEOs bet too much too fast.
4) Bankruptcy would weaken their guarantees, not just for CDOs and other exotic
financial instruments, but for the municipal bonds as well. Okay. We have a
problem. And it's a big problem. No one wants cities and schools to go bankrupt.
But what is the solution?

SOLUTION

1) The high-paid, free-wheeling, free-market CEOs go running to the government
for help! Here's where Spitzer and friends come in.
2) Spitzer sees an opportunity to save the world, look good, help the poor
suffering masses, and advance his career (all at the same time!). A government
solution? What could be better? It will be good for everyone: borrowers, the
system, MBIA, and Spitzer.
3) Unfortunately, Warren Buffett steps in and says he will guarantee the municipal
bonds (ending the crisis) but that MBIA will have to deal with the CDOs and
other exotic products on their own. So the crisis will be over, but MBIA will
still go bankrupt. This seems like a very good and fair solution. The cities,
schools, and system are saved, but the CEOs who gambled (and got highly paid
to do so) have to suffer.
4) MBIA rejects Buffett's offer and instead works with Spitzer and other
regulators to try to have the government provide guarantees (in other
words, we the taxpayer pay to bail out the CEOs, all in the name of "saving
the system," even though Buffett offered a tax-payer-free way to do the same).
5) Spitzer supports MBIA over Buffett! Amazing! And he's fighting for the common
folk? Why would Spitzer do this? Could it be that he will (a) be seen as having
rescued MBIA (instead of Buffett); (b) get massive campaign support for MBIA
executives and all their friends; (c) get a high-paid job with MBIA or friends
of MBIA after leaving office [if you don't believe me, look at where the New
York Fed guys ended up after Long-Term Capital, which incidentally, Buffett
ALSO offered to buy and was rejected].

Spitzer is smart. He knows how to play the game. "This could have been avoided
if the OCC had done its job," Spitzer said in the interview. "The OCC did nothing.
The Bush Administration let the housing bubble inflate and now that it's deflating
we're dealing with the consequences." Ok. Now you have everyone on board. Nobody
likes Bush these days.

According to a Reuters article: "Spitzer deflected questions about New York
state's role 10 years ago in allowing bond insurers, which had long guaranteed
safe public-sector bonds, to back risky mortgage bonds and complex structured
debt." Hmm. So maybe it's not so simple after all, Mr. Spitzer.

I've always imagined Robin Hood led a pretty good life in Sherwood Forest.

[FINAL NOTE: Again this is NOT a partisan attack on Elliott Spitzer. It is
an attack on the system and how it works, as represented by Gov. Spitzer. There
are a thousand examples I could have used with politicians from the other side.
My point is not that one side is better or worse than the other, but rather
that politicians and private business are working the system to enrich themselves
(at the country's expense) and avoid solid and defined rules. In addition,
to mask the problems and corruption, they are encouraging more and more debt
assumption to keep the system running. Obama is right. We need a change in
Washington. Mr. Obama, will you end this cycle of debt and corruption?]

FakeBen is a blog to monitor the Fed and its actions and encourage community
participation. At FakeBen, we believe that the Fed policy of the last two
decades has created a credit bubble as large as that created in the 1920s.
This bubble will lead to either inflation, a recession, or both.

We believe that the Fed's policy of lowering interest rates to encourage
more credit creation is misguided, will eventually lead to 0% interest rates,
and will not solve the long-term problem, which is too much credit relative
to GDP.